The UK economy recorded 0.0% growth in January 2026, significantly below expectations of 0.2%. This follows a modest 0.1% expansion in December, indicating a clear loss of economic momentum even prior to the Middle East conflict.
The UK economy recorded 0.0% growth in January 2026, significantly below expectations of 0.2%. This follows a modest 0.1% expansion in December, indicating a clear loss of economic momentum even prior to the Middle East conflict.
The services sector stagnated, while manufacturing and construction posted minimal growth.
Rising oil prices and energy supply disruptions now pose additional risks, increasing the likelihood of a stagflationary environment. Fuel prices have recorded their largest increase since 2022, and mortgage rates have risen, further pressuring households.
Bond Market Dynamics
UK gilt markets have experienced significant volatility, with short-term yields reaching near one-year highs and 10-year yields rising by approximately 40 basis points double the increase seen in U.S. and German bonds.
This reflects investor concerns over the UK’s structural inflation vulnerability, prompting a shift from rate-cut expectations toward potential rate hikes.
However, institutional investors such as Russell Investments and Marlborough Investment Management have begun accumulating UK gilts, viewing current pricing as overly pessimistic.
Outlook
The Bank of England is expected to adopt a cautious stance in its upcoming meeting. The pound outlook remains neutral:
Supported by rising bond yields
Weighed down by stagflation risks
GBP may strengthen modestly against weaker currencies but is expected to underperform against the U.S. dollar and Australian dollar.